Arbitration Update: CFPB Rule Uncertain, Mixed Fates for Others

A half dozen Obama-era rules to limit mandatory arbitration have met a variety of
fates in the four months since Donald Trump became president.

The Consumer Financial Protection Bureau rule, which covers financial products, hasn’t
been finalized yet and is in a perilous position.

Some consumer advocates argue the bureau should go ahead with it. But others caution
Congress could undo the rule as it did with one covering federal contractors, and
permanently bar the bureau from regulating arbitration in the future.

Congress reversed the federal contractor rule under the Congressional Review Act in
March.

Anti-arbitration rules covering nursing homes and communication contracts have been
put on hold by their originating agencies, while two others appear to be in the clear,
at least for now.

Those rules, which apply to for-profit colleges and financial advisers, could, however,
still be challenged in the courts.

Meanwhile, on the litigation front, another hot-button arbitration topic—the use of
class-action waivers in employment contracts—is up in the air until the U.S. Supreme
Court takes it next term.

Below is the current status of the CFPB rule, and five others
advanced under the Obama administration.

CFPB Arbitration Rule Perilous

The CFPB’s proposed
rule—released May 5, 2016, after years of study by the bureau—would bar banks and other
financial institutions from using mandatory arbitration clauses to prevent class actions.

The bureau received nearly 13,000 comments on the proposed rule by the Aug. 22, 2016,
deadline. The final rule was expected by mid-2017. But nothing has happened yet.

Professor David Noll told Bloomberg BNA the bureau engaged in the “monumental task”
of sorting through the comments and improving on the rule’s cost-benefit analysis
to get it ready for publication.

The bureau is taking its time to get it right because it knows congressional and legal
challenges lie ahead, he said. Noll specializes in civil procedure and regulation
at Rutgers Law School in Newark, N.J.

But defense attorney Alan S. Kaplinsky told Bloomberg BNA that “it would be bordering
on reckless”
for CFPB Director Richard Cordray to finalize the rule because of the risk it will
be overturned under the CRA. Kaplinsky leads the consumer financial services group
at Ballard Spahr in Philadelphia.

The CRA allows Congress to reverse an agency rule within 60 legislative days of its
publication in the Federal Register. Until Trump’s administration began, the law had
only been invoked once since it was passed in 1996, Noll said.

But since the start of the 115th Congress in January, 59 disapproval resolutions have
been introduced and 13 have passed.

Those odds aren’t good for the CFPB rule, Kaplinsky said. Congressional Republicans
will be in lock step against it, he predicted. “The forces behind an override will
be very very strong.”

But consumer advocate F. Paul Bland isn’t so sure Republicans have the political will
to take down the rule, at a time when Americans—even Trump voters—aren’t too pleased
with big banks. Bland is executive director of Public Justice in Washington.

Bland called fears about CRA reversal “a recipe for paralysis.” “You miss all the
shots you don’t take,” he said.

He pointed to the Wells Fargo fake account scandal, which snowballed to affect two
million customers because mandatory arbitration shut down two early suits. Negative
attention on Wells Fargo makes reversing the CFPB a “very hard vote for a lot of Republicans”
in Congress, he told Bloomberg BNA.

Noll said the CFPB could go either way on the rule. On the one hand, the risk of CRA
reversal is very high, and the stakes are increased because CRA reversal bars the
agency from ever issuing a “substantially similar” rule.

On the other hand, a recent CRA vote may show that Congress’s support for the administration
is waning, Noll said.

Sens. John McCain (R-Ariz.), Susan Collins (R-Maine), and Lindsay Graham (R-S.C.)
broke with their party May 10 to vote down a resolution to reverse an Environmental
Protection Agency rule restricting methane emissions.

Noll suggested that Cordray is taking Congress’s temperature and might be waiting
to release the rule until congressional support for the administration splinters further.

Kaplinsky countered that the CFPB’s best bet is to play the long game and hold off
on the rule until a future administration.

Contractor, Nursing Home, FCC Rules Nixed

One rule has already fallen victim to the CRA.

President Barack Obama signed an executive order in July 2014 banning mandatory arbitration
agreements in new federal procurement contracts over $1 million.

Under the order, federal contracting officers would have been required to ensure that
covered contractors didn’t mandate pre-dispute arbitration agreements for claims of
sexual assault, sexual harassment and violations of Title VII of the Civil Rights
Act of 1964. The General Services Administration issued
regulations implementing the EO in October 2016.

But those regulations were overturned under a CRA resolution March 27, according to
the George Washington University Regulatory Studies Center’s
CRA Tracker. The White House
revoked the EO the same day.

Two other anti-arbitration rules that have been halted cover nursing homes and communication
services.

The rule banning arbitration clauses in nursing home contracts was challenged in court
before it even went into effect.

The Department of Health and Human Services Centers for Medicare & Medicaid Services
issued the final rule in September 2016 that would have barred nursing homes from
including pre-dispute binding arbitration provisions in admission documents.

The rule was supposed to affect new nursing home agreements signed after Nov. 28.
But a Nov. 11 federal court decision stayed implementation of the rule while the court
considered its legality.

The big question after the court decision was whether CMS would appeal, Noll said.
But in April CMS announced it would reconsider the rule altogether.

Meanwhile, the Federal Communications Commission said in October 2016 that it planned
to address mandatory arbitration clauses in contracts for communication services.

But soon after Trump took office, the commission announced it was putting off those
plans.

“I would be shocked if Chairman Pai thinks this is an issue that requires commission
action,” Noll said, referring to FCC Chairman Ajit V. Pai.

For-Profit College, Fiduciary Rules Proceed

Despite the setbacks to the three Obama-era rules covering federal contractors, nursing
homes, and communication services, two other rules appear to be in the clear, at least
for now. These two rules cover for-profit colleges and financial advisers.

The Department of Education cleared the CRA 60-legislative-day hurdle in mid-May,
professor Adam Zimmerman told Bloomberg BNA in an email.

Zimmerman teaches complex litigation and administrative law at Loyola Law School in
Los Angeles.

The agency issued a final rule in October 2016 that prohibits post secondary schools
that participate in its federal direct loan program from requiring students to sign
pre-dispute arbitration agreements.

The rule allows students to choose where to pursue claims against an institution and
prohibits institutions from banning class actions by students.

“Interestingly, there wasn’t enough of a political appetite to reverse the DoE rule
under the CRA, in part, because repeal under the CRA would have also eliminated other
desirable parts of the DoE rule, like a provision that permitted the DoE to claw back
funds from failed for-profit colleges and collectively respond to claims for student
debt relief (particularly by veterans),”
Zimmerman said.

An association that represents California technical schools
filed a court challenge to the rule May 24. “It claims that the DoE decision was the result
of a rushed process, arbitrary and capricious, and contravenes Supreme Court precedent
and the [Federal Arbitration Act] policy favoring arbitration,” Zimmerman said.

Another rule proceeding relates to financial advisers.

The Department of Labor issued a final rule in April 2016 that bans financial advisers
from forcing consumers of certain retirement products from signing forced arbitration
clauses with class-action waivers.

The class action provision is part of the rule’s “best interest contract” exemption
from the Employee Retirement Income Security Act’s prohibited transactions, which
allows financial advisers to use certain compensation arrangements that might otherwise
be forbidden as long as they put their clients’ best interests first.

The DOL delayed portions of the Obama administration’s regulatory package that aimed
to reduce the allegedly conflicting investment advice given to retirement savers until
June 9.

But Labor Secretary Alexander Acosta wrote a Wall Street Journal op-ed May 22 saying
the measure will take effect June 9 with no further delay.

Acosta said the DOL would seek additional public input on the rule but didn’t find
a legal basis to adjust the start date while doing so.

Other portions of the rule are delayed until at least Jan. 1, 2018, while the rule
is under a presidentially mandated review by the agency.

“It would be a difficult rule to rescind or modify because Labor compiled a very extensive
record in support of it,” professor Noll said. “Of all the arbitration rules I’ve
read, it was probably the most carefully done.”

Plus financial firms are already moving to comply with it despite the fact that it’s
being challenged in court. “Events on the ground are probably outpacing the litigation,”
Noll said.

NLRB Arbitration Ban Before Supremes

Meanwhile, on the litigation front, the Supreme Court will consider later this year
another controversial arbitration issue, this one related to labor and employment
law.

In 2012, the National Labor Relations Board decided that the National Labor Relations
Act bars enforcement of arbitration agreements that waive employees’ rights to pursue
class or collective claims in court or arbitration.

A circuit split exists as to whether the NLRB correctly interpreted the law and, in
January, the top court agreed to review the issue. But it put off oral arguments until
the October term, meaning it isn’t likely to issue a ruling until 2018.

Enforcement actions involving the question are on hold in the NLRB’s field offices
until the Supreme Court makes a decision, Noll said.

But an interesting, and possibly outcome-changing, wrinkle in the matter is that Trump
will get to appoint new members to the NLRB, Zimmerman said. “It appears poised to
change course.”

“Based on early motions in the case to reorder the briefing schedule, it appears the
Trump administration will switch sides and will likely side with the businesses in
that case,” he said.

Noll noted, however, that the solicitor general’s office—currently run by Acting SG
Jeffrey B. Wall—may feel pressure from the court to stick with the arguments it made
in the petitions for review, filed during the Obama administration.

“The last time there was a change of administration and the SG’s office changed sides
on some issues, Chief Justice John Roberts was extremely critical of the SG’s office,”
Noll said.

Pressure from Attorney General Jeff Sessions and the White House counsel’s office
could override that, he said.

To contact the reporter on this story: Perry Cooper in Washington at
pcooper@bna.com

To contact the editor responsible for this story:
Steven Patrick at
spatrick@bna.com